You will either pay it to a management company or pay it to yourself. Either way including that fee best ensures you are making a decision based on the reality of the business and are compensated according to the effort you are willing to put into it.
So let’s start off with a quick list of why you might be looking to get into real estate investments.
- Looking to add a stable, long-term income source to their investment portfolio
- Can’t or don’t want to sell your home and need to hold onto it whilst not having 2 mortgages
- You’ve heard real estate is a good investment anyone can get into and get rich
If you’re a long-term investor who is adding to an already existing investment portfolio you already understand management doesn’t cost anything more than normal operating costs. No matter what investment you own there is someone managing it. The example I like to use is a stockbroker; who having access to your money is charged with applying the money to stocks they believe will meet or beat your financial expectations. The operations of how the money is used is completely dependent on the management team of the various companies your money has been loaned to. They build, market, and sell the widget or service. Your money is working and hopefully, it is churning out cash and value at the other end of the process. Odds are you will not be successful in finding an investment for your money and not have to pay a management team to deal with the operations of their industry. Real estate is actually one of the few exceptions, at least in theory. More on that in a bit.
Getting into real estate investments is very similar to the stock market. The cash is outlaid for the acquisition of ownership, in this case, real property (house, apt building, strip mall, etc). Along with that acquisition comes the management of the property; that is to say the day-to-day activities, building efficient processes, competing, marketing, leasing, and being able to report financials to yourself, investors, and Uncle Sam.
There is a difference, which I’d eluded to above, with real estate investment; or at least perceived to be a difference. This is where any other reason another item 1 above gets to be a little awkward.
Real estate has a relatively low entrance barrier. You as an individual are buying both the asset and the operational structure of an entire business. It’s alluring because you get to be the CEO of your company and no doubt the Pro-forma you were given by the seller made all the sense in the world.
Hiring a Property Manager?
Here is how you know whether you have the opportunity to even decide whether you have a choice of hiring a management company; Are you an expert? Simple enough, but what do you need to know to do it effectively, to make money at it w/o exposing yourself to major risks?
- Marketing: Understand online and print marketing. The wording makes a difference and you can certainly overpay for this service, but if you know-how, great.
- Leasing: This is the most time-consuming part of the business. You need to adapt to the prospective tenant’s schedule, that is to say, be there for them when they need you.
- Maintenance: Having a good understanding of the building’s systems is paramount to effectively keep costs down.
- Customer Service: There is a horrible misunderstanding in the world of real estate and that is that the landlord is at the top of the relationship hierarchy. This misconception is a hangover from our victorian past. Not only are their VERY good legal reasons for you to treat tenants like the customers they are, but also in today’s society people are quick to vote with their feet and they know they have the right to decent living conditions whether you can afford to offer them or not. My recommendation is to understand conflict resolution very well and have the discipline to apply it.
- Turnovers: Preparing a unit for a new occupant is one of the most critical parts of the process. It will cost you no less to consolidate energies into the front end of a turnover project so do it. Have your team (or yourself) at the ready to get that project managed timely. Every day that a unit is vacant is revenue you cannot recuperate.
- Evictions: Hire a lawyer even if technically you can handle it yourself as an individual. This isn’t even worth expounding on, just do it and you’ll save money.
- Selecting tenants: Have a system of pulling credit (criminal and financial) and develop a methodology that you will NOT waiver from. This is an area of extreme liability so make a system that automates it for you or you can easily find yourself paying tens of thousands of dollars in fines and be exposed to being sued.
- Government agencies: EPA, OSHA, Equal Housing, city contracting ordinances, licensing laws (e.g. HVAC, Plumbing) to name a few. These agencies can crush an individual’s investment to less than worthless.
Wow, I re-read that and it seems like a scare tactic. That was not the intent, and it isn’t to say you don’t have the skills &/or patience to handle it. This is an industry and this industry has experts all over the place. If you are not an expert and are competing against experts you can bet the learning curve will be steep before you start meeting your financial objectives in many cases. As negative-Nancy as it comes across each of these areas present very real risks; anything from disappointed tenants to $11K per day per occurrence in penalties.
What does a management fee include? Well, that’s you’re pro-rated portion to pay into the infrastructure of an already existing company. It’s the administrative and executive labor & the underlying company structure you will not have to build yourself.